With tax collections apparently leveling off this year, lawmakers are now pressing state tax officials to explain what they plan to do to capture millions of dollars in uncollected taxes owed for internet sales in Hawaii.
Years ago the state sued online travel companies such as Expedia Inc. and Travelocity.com to force them to pay state excise taxes on Hawaii hotel rooms that are booked and paid for online. The Attorney General’s Office won a major victory when Hawaii courts in 2015 ordered the online travel companies to pay $53.1 million in back taxes to the state.
Yet more than a year after those court rulings, state tax officials told lawmakers they still have not established a system for collecting excise taxes owed by smaller travel companies that also sell Hawaii travel packages online.
“We’re still having discussion on how to enforce it,” said Damien A. Elefante, deputy director of the state tax department, in an interview. The state is also still trying to reach a tax settlement with car rental companies for back taxes the state contends they owe for online car rentals, he said.
Elefante also testified before the House Finance Committee earlier this month that the state has no mechanism for collecting taxes on sales by online retail behemoths such as Amazon.com.
“Right now the (excise) use tax is a voluntary compliance situation,” Elefante told lawmakers. “We haven’t gone out to ask every (person) how much you’ve bought or have you bought. We haven’t done that because there’s no information for us to look at readily, so with respect to the use tax on Amazon sales or sales online, we haven’t looked at it.”
This is a sore point for some lawmakers this year because state tax collections are lagging. Gov. David Ige’s proposed budget for the next two years assumed tax collections would grow by 5.5 percent during this fiscal year, while actual tax revenue has grown by only 0.6 percent in the first six months of the year.
Hawaii’s excise tax on sales and services is the state’s largest single source of tax revenue, generating more than $3.2 billion for the state treasury last year, according to data from the state tax department.
State Rep. Isaac Choy (D, Manoa-Punahou-Moiliili) told Elefante that the shift from traditional storefront retail sales to online sales probably helps explain the apparently flat retail excise tax collections this year at a time when the economy is booming.
The issue presents a growing problem for the state, Choy said, and “all of a sudden we have wild shifts in reporting, but you guys are the protectors of the realm, so I’m just asking what you’re going to do about it.”
Choy complained he has submitted bills to try to begin to address the online tax problem, yet the tax department has opposed them all.
At a minimum, Choy suggested the tax department could ask taxpayers to voluntarily report their online purchases so the state would have at least some data for collection purposes, but Elefante said the Hawaii tax department doesn’t do that.
“So, basically, I guess the answer is, you’ve made no effort to collect taxes on online sales,” Choy said.
Elefante replied that “as far as that goes, representative, we haven’t.”
State Tax Director Maria E. Zielinski added, “I think all of the states have the same issue.” Zielinski and Elefante did not elaborate, and a spokeswoman for the tax department said tax officials “can’t really discuss details of (the) compliance plan.”
Tom Yamachika, president of the Tax Foundation of Hawaii, said other states have tried a variety of approaches to capture taxes owed for online sales.
Part of the challenge is the U.S. Supreme Court ruled that online retailers are not required to pay state sales taxes unless they have a physical presence in that state. In practice that means that even though Amazon likely has significant online sales to customers here, Elefante said Amazon does not file and pay excise taxes in Hawaii.
Yamachika said Amazon’s customers in Hawaii technically still have a legal obligation to report their online purchases and pay taxes on them, “but really, nobody does. It’s very, very rare.”
To cope with those issues, Colorado recently passed a law requiring online retailers to report what they sell in Colorado along with a list of who made the purchases, Yamachika said. That law also requires online retailers to notify all customers that they must pay Colorado sales tax on their purchases.
That law survived court challenges, and Yamachika said some online sellers then agreed to collect the taxes on online sales and hand them over to Colorado tax authorities.
They likely did so because it was logistically easier and less costly for the online retailers to collect and surrender the taxes than to produce the customer and sales lists and issue the customer notices that Colorado demanded, Yamachika said.
“The game in town is to try to get the direct sellers to the bargaining table,” Yamachika said.
Other states have passed laws to legally declare that any online seller that does significant business in a state by definition has a “presence” in that state, and must therefore collect and pay state taxes.
“To the extent that we can get some of these taxes collected and paid, it will reduce the burden on the rest of us,” Yamachika said. “The tax is legally imposed. It’s just a question of whether it’s practical to collect it.”
On the issue of travel companies, Elefante said he believes the large companies that were sued by the state including Expedia, Travelocity, Orbitz LLC and Priceline.com LLP are now paying state excise taxes, but it is unclear whether smaller travel companies do so.
“Some people have come into compliance already, because if they want to do business in Hawaii, they’re going to pay,” Elefante said. “It’s just finding these companies.” Elefante said he does not know how much revenue the state might be losing because of smaller travel companies that haven’t paid.
Members of the state Senate expressed frustration earlier this month at the seemingly slow pace the department has been moving to resolve the online travel tax issue, but Elefante said the issue is new, and the department is moving at its “regular pace.”
The department must balance these efforts with existing collection and audit responsibilities as well as a major ongoing overhaul and upgrade of the department’s computer systems, he said.
“They’re saying that we’re not going fast enough. I say we’re doing as much as we can administratively to go after these entities,” Elefante said.